3. 3
INTRODUCTION
Officially, Indian policymakers have always been concerned with the reduction of poverty and
inequality. However, between the first five year plan after independence in 1947 and the turn
of the century, Indian economic policy making went through a sea of change. After
independence and for a period of about forty years, India followed a development strategy
based on central planning. One of the reasons for adopting an interventionist economic policy
was the apprehension that total reliance on the market mechanism would result in excessive
consumption by upper-income groups, along with relative under-investment in sectors essential
to the development of the economy. Policymakers in India adopted a middle path, in which
“there was a tolerance towards income inequality, provided it was not excessive and could be
seen to result in a higher rate of growth than would be possible otherwise.” In this context
however, the macroeconomic sensitivity to inflation as fallout from growth reflected
government concerns regarding the redistributive effects of inflation, which typically affected
workers, peasants and unorganized sectors more.
From the mid-1980s, the Indian government gradually adopted market-oriented economic
reform policies. In the early phase, these were associated with an expansionist fiscal strategy
that involved additional fiscal allocations to the rural areas, and thus counterbalanced the
redistributive effects of the early liberalization. The pace of policy change accelerated during
the early 1990s, when the explicit adoption of neo-liberal reform programs marked the
beginning of a period of intensive economic liberalization and changed attitudes towards state
intervention in the economy. The focus of economic policies during this period shifted away
from state intervention for more equitable distribution towards liberalization, privatization and
globalization. This study focuses on the period when these neo-liberal and market-oriented
economic policies were being implemented in India. However, it should be noted that the
Indian experience with such policies over this period was more limited, gradual and nuanced
than in many other developing countries, with correspondingly different economic effects. This
4. 4
paper gives an overview of the nature and causes of inequality trends since the mid-1990s and
tries to explain the observed trends.
RELEVANCE OF STUDY
Trends in income and consumption inequality in India
The debate on economic policy and reform began in India in the 1980s, and continues today.
Prior to the extensive introduction in 1991 of the new economic policy, as it came to be known,
there was widespread apprehension that liberalization and excessive reliance on market forces
would lead to increases in regional, rural-urban and vertical inequalities in India. Nearly sixteen
years later, the issue is still under debate, with various studies unable to give an unequivocal
verdict. Economists continue to disagree on whether income and consumption inequality
increased in India during the reform period.
A number of studies based on the National Sample Survey (NSS) estimates of household
consumption expenditure reveal mixed evidence on aggregate and regional trends. For
example, Bhalla (2003) reported that both urban and rural Gini coefficients declined between
1993-1994 and 1999-2000 (Annexure A; Table 1).
Table 1.
Consumption distribution of India, 1983 to 1999-2000
Consumption Distribution, NSS
Share of: 1983 1987-
1988
1993-
1994
1999-
2000
Rural Quintile 1 8.9 9.3 9.6 10.1
Quintile 2 13.1 13.2 13.5 14.0
Quintile 3 16.7 16.5 16.9 17.3
Quintile 4 21.7 21.3 21.6 21.9
Quintile 5 39.6 39.6 38.5 36.7
Gini 30.4 29.9 28.6 26.3
Urban Quintile 1 8.1 8.0 8.0 7.9
Quintile 2 12.1 11.7 11.9 11.7
Quintile 3 15.8 15.5 15.7 15.7
5. 5
Quintile 4 21.5 21.4 21.6 21.7
Quintile 5 42.6 43.4 42.8 43.0
Gini 33.9 35.0 34.4 34.7
National Quintile 1 8.4 8.6 8.7 8.9
Quintile 2 12.5 12.4 12.4 12.6
Quintile 3 16.2 15.8 15.9 16.0
Quintile 4 21.4 21.1 21.1 21.1
Quintile 5 41.4 42.1 41.8 41.4
Gini 32.5 32.9 32.5 32.0
Source: Bhalla (2003).
A number of studies based on the National Sample Survey (NSS) estimates of household
consumption expenditure reveal mixed evidence on aggregate and regional trends. For
example, Bhalla (2003) reported that both urban and rural Gini coefficients declined between
1993-1994 and 1999-2000 (Table 1). According to his calculations, rural inequality decreased
in 15 out of 16 major states of India, and urban inequality declined in 8 of the 17 states over
this period. He therefore concluded that inequality had not worsened in India during the period
of reform.
Another study by Singh and others (2003) could not find strong evidence of increases in
household inequality for the period 1993-1994 to 1999-2000. According to Singh and others
(2003: 12), “there are some indications of increases in regional inequality, but they are neither
uniform nor overly dramatic”. Singh and others also studied convergence of economic
performance at a sub-state level. Using a set of five variables (petrol sales, diesel sales, bank
credit, bank deposits and cereal production), their study found that during the post reform
period, some states experienced increasing within-state inequality.
The Government of India National Human Development Report (2001) published the state-
wide Gini coefficients for the years 1983, 1993-1994 and 1999-2000. These coefficients were
estimated using the 38th, 50th & 55th rounds of Household Consumer Expenditure survey
conducted by the National Sample Survey (NSS) of India. Comparing the level of inequality
between 1993-1994 and 1999-2000, among the 32 states and union territories reported showed
that seven states experienced an increase in rural inequality and fifteen states experienced an
increase in urban inequality. There were five states where both urban and rural inequalities
6. 6
increased. It is interesting to note that all these five states were located in the North-Eastern
part of India.
The Government of India National Human Development Report (2001) published the state-
wide Gini coefficients for the years 1983, 1993-1994 and 1999-2000. These coefficients were
estimated using the 38th, 50th & 55th rounds of Household Consumer Expenditure survey
conducted by the National Sample Survey (NSS) of India. Comparing the level of inequality
between 1993-1994 and 1999-2000, among the 32 states and union territories reported showed
that seven states experienced an increase in rural inequality and fifteen states experienced an
increase in urban inequality. There were five states where both urban and rural inequalities
increased. It is interesting to note that all these five states were located in the North-Eastern
part of India1.
It is also notable that during the reform period, urban inequality in India was much higher than
rural inequality for most of the states. In fact, in 31 of the 32 states and union territories, urban
inequality was higher than rural inequality. This was also reflected in the all India figures,
which showed that urban inequality remained higher than rural inequality in all the reference
years. Moreover, it could also be seen that from 1983 to 1999-2000, the rural Gini declined
consistently, but there was a gradual rise in urban inequality during the same period (See
Annexure A; Figure 1). (Looking into Annexure A: Table 2 for more details.)
1 States and Union Territories where Rural Inequality has increased: Assam, Manipur, Mizoram, Nagaland,
Sikkim, Chandigarh, Dadra and Nagar Haveli and Arunachal Pradesh. States and Union Territories where Urban
Inequality has increased: Assam, Bihar, Gujarat, Haryana, Karnataka, Manipur, Mizoram, Nagaland, Punjab,
Sikkim, Tamil Nadu, Tripura, Uttar Pradesh, Daman and Diu. Both urban and rural inequality has increased in
Assam, Manipur, Mizoram, Nagaland and Sikkim.
7. 7
FIGURE 1
It is also notable that during the reform period, urban inequality in India was much higher than
rural inequality for most of the states. In fact, in 31 of the 32 states and union territories, urban
inequality was higher than rural inequality. This was also reflected in the all India figures,
which showed that urban inequality remained higher than rural inequality in all the reference
years. Moreover, it could also be seen that from 1983 to 1999-2000, the rural Gini declined
consistently, but there was a gradual rise in urban inequality during the same period (See
Figure 1).
Table 2.
Trends in rural and urban inequality in India
1993-1994 1994-1995 1995-1996 1997 1999-
2000a
1999-
2000b
Rural Gini 28.50 29.19 28.97 30.11 26.22 26.33
Urban Gini 34.50 33.43 35.36 36.12 34.40 34.25
Figure 1. Rural and Urban Gini Coefficients of India
0.25
0.26
0.27
0.28
0.29
0.30
0.31
0.32
0.33
0.34
0.35
1983 1993-1994 1999-2000
Rural
Urban
8. 8
Source: Jha (2004), 1999-2000a –Using 30 day recall method, 1999-2000b – Using 7 day
recall, the shorter recall period was used in the 55th round.
Using data from different rounds of the National Sample Surveys, Jha (2004) calculated rural
and urban inequality in India. Table 2 reflects Jha’s results for the period 1993-1994 to 1999-
2000. It shows that both rural and urban Gini coefficients increased in the period between 1993-
1994 and 1997, and declined between 1997 and 1999-2000. However, as Jha pointed out, and
as discussed below, changes in the methodology used in the 55th round National Sample
Survey meant that the results for 1999-2000 were not comparable to earlier rounds. Therefore,
care should be taken not to interpret the lower Gini coefficients of 1999-2000 as a sign of
declining inequality in India.
Most studies have used various rounds of NSS consumption expenditure survey statistics for
calculating per capita incomes and Gini coefficients. But there is a well-known problem of lack
of comparability of NSS statistics between the latest (55th round, 1999-2000) round and the
earlier ones. As Sen (2001) pointed out, the reference periods in the Consumer Expenditure
Survey of the 55th round of NSS survey were changed from the uniform 30 day recall, used
till then, to both seven and 30 day questions for items of food and intoxicants and to 365 day
questions for items of clothing, footwear, education, institutional medical expense and durable
goods. As Deaton and Dreze (2002) explained, the change from 30 to 365 days in the reporting
period for these low frequency items possibly led to lower poverty and inequality estimates.
According to them, the longer reporting period reduced the mean expenditures on these items,
but because a much larger fraction of people reported something over the longer reporting
period, the bottom tail of the consumption distribution was pulled up, and as a result, both
inequality and poverty were reduced.
According to estimates by Sen and Himanshu (2005), the new methodology lowered the
measured rural poverty in India by almost 50 million. As a consequence, rural inequality
measures were also affected. Revised estimates of rural inequality had been calculated by
Deaton and Dreze (2002), Sundaram and Tendulkar (2003a, 2003b) and Sen and Himanshu
(2005). In general, these studies revealed that although the unadjusted data showed decreasing
inequality between rounds 50 and 55, the adjusted (comparable) data suggested that rural
inequality had, in fact, gone up in India between 1993-1994 (50th round) and 19992000 (55th
round). Sen and Himanshu argued that the adjusted figures indicated that the more accurate
change in rural inequality between the 50th and 55th rounds was an almost three Gini point
increase, rather than a two Gini point decline. Deaton and Dreze (2002) and Sundaram and
9. 9
Tendulkar (2003b) also came to the conclusion that rural inequality increased in the period
between 1993-1994 and 1999-20002.
Sen and Himanshu (2005) provided striking evidence about increased inequality in India in the
post-reform period. Based on indices of real Mean Per Capita Expenditure (MPCE) by fractile
groups, Sen and Himanshu showed that whereas the consumption level of the upper tail of the
population, including the top 20 per cent of the rural population, went up remarkably during
the 1990s, the bottom 80 per cent of the rural population suffered during this period (Figure 2).
This graph clearly shows that the consumption disparities between the rich and the poor and
between urban and rural India increased during the 1990s. These findings are based on the NSS
‘thin sample’ surveys, conducted annually since 1986. These surveys are not as comprehensive
as the NSS comprehensive rounds or the ‘thick sample’ surveys, but provide sufficiently good
estimates at the national level. Also, these thin sample results are comparable because they use
a common type of questionnaire.
Most studies have used various rounds of NSS consumption expenditure survey statistics for
calculating per capita incomes and Gini coefficients. But there is a well-known problem of lack
of comparability of NSS statistics between the latest (55th round, 1999-2000) round and the
earlier ones. The reference periods in the Consumer Expenditure Survey of the 55th round of
NSS survey were changed from the uniform 30 day recall, used till then, to both seven and 30
day questions for items of food and intoxicants and to 365 day questions for items of clothing,
footwear, education, institutional medical expense and durable goods. The change from 30 to
365 days in the reporting period for these low frequency items possibly led to lower poverty
and inequality estimates. According to them, the longer reporting period reduced the mean
expenditures on these items, but because a much larger fraction of people reported something
over the longer reporting period, the bottom tail of the consumption distribution was pulled up,
and as a result, both inequality and poverty were reduced.
According to estimates by Sen and Himanshu (2005), the new methodology lowered the
measured rural poverty in India by almost 50 million. As a consequence, rural inequality
measures were also affected. Revised estimates of rural inequality had been calculated by
Deaton and Dreze (2002), Sundaram and Tendulkar (2003a, 2003b) and Sen and Himanshu
(2005). In general, these studies revealed that although the unadjusted data showed decreasing
inequality between rounds 50 and 55, the adjusted (comparable) data suggested that rural
10. 10
inequality had, in fact, gone up in India between 1993-1994 (50th round) and 19992000 (55th
round). Sen and Himanshu argued that the adjusted figures indicated that the more accurate
change in rural inequality between the 50th and 55th rounds was an almost three Gini point
increase, rather than a two Gini point decline. Deaton and Dreze (2002) and Sundaram and
Tendulkar (2003b) also came to the conclusion that rural inequality increased in the period
between 1993-1994 and 1999-20002.
Sen and Himanshu (2005) provided striking evidence about increased inequality in India in the
post-reform period. Based on indices of real Mean Per Capita Expenditure (MPCE) by fractile
groups, Sen and Himanshu showed that whereas the consumption level of the upper tail of the
population, including the top 20 per cent of the rural population, went up remarkably during
the 1990s, the bottom 80 per cent of the rural population suffered during this period (Annexure
A; Figure 2). This graph clearly shows that the consumption disparities between the rich and
the poor and between urban and rural India increased during the 1990s. These findings are
based on the NSS ‘thin sample’ surveys, conducted annually since 1986. These surveys are not
as comprehensive as the NSS comprehensive rounds or the ‘thick sample’ surveys, but provide
sufficiently good estimates at the national level. Also, these thin sample results are comparable
because they use a common type of questionnaire.
Similarly, using adjusted NSS data, Deaton and Dreze (2002) found three distinct trends of
changing patterns of inequality during the 1990s. They showed that there is strong evidence of
divergence in per capita consumption across states. Secondly, their estimates of state-wise per
capita expenditure revealed that rural-urban inequality in per capita expenditure significantly
increased at an all-India level. They also found strong evidence of increased rural-urban
inequalities within states between 1993-1994 and 1999-2000. Jha (2004) also concluded that
in both rural and urban sectors, all-India level inequality was higher during the post reform
period than it was during the crisis period of the early 1990s.(See more at Annexure A; Figure
2).
Regional inequality
2 According to Deaton and Dreze (2002), the direct use of the 55th round—with no adjustment—shows a
substantial reduction in inequality within the rural sectors of most states, with little or no increase in the urban
sectors.But when corrections are made, results showthat intra-state rural inequality has not fallen, and there have
been marked increases in intra-state urban inequality. Sundaram and Tendulkar’s findings show that unadjusted
Gini indices for rural India are 28.6 and 26.3 from the unadjusted 50th and 55th Rounds respectively. This shows
a decline in rural inequality. However, the revised and comparable estimate of Sundaram-Tendulkar (2003b)
shows that the revised 50th round rural Gini was only 25.8. This implies that according to the revised data, rural
inequality has gone up between the 50th and the 55th Rounds.
11. 11
There was a sharp increase in regional inequality in India during the 1990s. In 2002-2003, the
per capita Net State Domestic Product (NSDP) of the richest state, Punjab, was about 4.7 times
that of Bihar, the poorest state. This ratio had increased from 4.2 in 1993-1994. A time-series
graph of this ratio shows that the disparity between the richest and poorest state shot up
remarkably during the 1990s (Annexure A; Figure 4).
To illustrate this, we have benchmarked the average per capita net SDP of the three richest
states (Punjab, Haryana and Maharashtra against the average per capita net SDP of the two
poorest states (Bihar and Orissa) (Annexure A, See Figure 4).
Poverty Trends in the 1990s
In addition to the discussion on inequality in India during the 1990s, there is a similar debate
on the extent of poverty reduction during this same period. This debate essentially centres on
two controversial and interlinked issues.
1.
FIGURE 2
Similarly, using adjusted NSS data, Deaton and Dreze (2002) found three distinct trends of
changing patterns of inequality during the 1990s. They showed that there is strong evidence of
divergence in per capita consumption across states. Secondly, their estimates of state-wise per
capita expenditure revealed that rural-urban inequality in per capita expenditure significantly
12. 12
increased at an all-India level. They also found strong evidence of increased rural-urban
inequalities within states between 1993-1994 and 1999-2000. Jha (2004) also concluded that
in both rural and urban sectors, all-India level inequality was higher during the post reform
period than it was during the crisis period of the early 1990s.
Figure 3.
India; Real income of top one per cent of income earners as a share of total income
Source: Banerjee and Piketty (2001).
Banerjee and Piketty (2001) also highlighted disproportionately large income/consumption
gains by the upper tail of the population. Based on income tax reports, they found that in the
1990s, the real incomes of the top one per cent of income earners in India increased by about
50 per cent (Figure 3). Furthermore, among this top one per cent, the richest one per cent
increased their real incomes by more than three times during the 1990s. Figure 3 shows the real
income of the top one per cent of income earners in India as a share of total income. Banerjee
and Piketty argued that the U-shaped pattern depicted in figure 3 was broadly consistent with
the evolution of economic policy in India. While the ‘socialist policies’ of the early part of the
planning period shrank the income share of the top earners very substantially until the mid-
1980s, more open and pro-market policies have since allowed the ultra-rich to increase their
share substantially. Sen and Himanshu also provided state wide rural and urban Gini
coefficients for the 50th round and the 55th round NSS surveys. These Gini coefficients were
comparable because they were based on adjusted data for the 50th and 55th rounds. Table 3
13. 13
shows the Gini coefficients, where it can be seen that for the rural sector, eight of the fifteen
states experienced a decline in inequality, while in seven others, inequality increased.3 On the
other hand, it was noteworthy that for all the 15 major states, urban inequality increased by
1999-2000 as compared to 1993-1994.
Table 3 Gini coefficients
Figure 4.
Widening Disparity between the
Richest and Poorest States
Rural Urban
50th
round
55th
round
50th
round
55th
round
Andhra Pradesh 24.9 23.8 30.3 31.7
Assam 17.6 20.3 28.3 31.2
Bihar 20.9 20.8 29.7 32.3
Gujarat 22.3 23.8 26.9 29.1
Haryana 26.9 25.0 26.7 29.2
Karnataka 24.3 24.5 30.4 33.0
Kerala 27.2 29.0 32.3 32.7
Madhya Pradesh 25.0 24.2 29.7 32.2
Maharashtra 26.7 26.4 33.5 35.5
Orissa 22.4 24.7 29.4 29.8
Punjab 23.8 25.3 26.5 29.4
Rajasthan 23.5 21.3 26.8 28.7
Tamilnadu 28.2 28.4 32.8 39.1
Uttar Pradesh 25.2 25.0 30.2 33.3
West Bengal 23.8 22.6 32.7 34.3
All India 25.8 26.3 31.9 34.8
14. 14
Source: Banerjee and Piketty (2001).
There was a sharp increase in regional inequality in India during the 1990s. In 2002-2003,
the per capita Net State Domestic Product (NSDP) of the richest state, Punjab, was about
4.7 times that of Bihar, the poorest state. This ratio had increased from 4.2 in 1993-1994. A
time-series graph of this ratio shows that the disparity between the richest and poorest state
shot up remarkably during the 1990s (Figure 4). This has been highlighted by Ghosh and
Chandrasekhar (2003), who showed that inter-state inequality increased sharply in India
during the reform period. As the authors pointed out, based on per capita SDP, the basic
hierarchy of the Indian states remained the same during the reform period, with Punjab,
Haryana and Maharashtra at the top, and Bihar and Orissa at the bottom. They also noted
that the gap between the richest and poorest states opened up considerably after 1990-1991.
To illustrate this, the authors benchmarked the average per capita net SDP of the three richest
states (Punjab, Haryana and Maharashtra against the average per capita net SDP of the two
poorest states (Bihar and Orissa) (See Figure 4).
Ratio of Per Capita Net State Domestic
Product of the Richest (Punjab) and the
Poorest (Bihar) Major State of India
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Ratio of Per Capita Net State Domestic
Product of 3 Richest States (Punjab,
Haryana, Gujarat) and the two poorest
States (BiharandOrissa)
2.00
2.20
2.40
2.60
2.80
3.00
3.20
3.40
15. 15
Ahluwalia (2002) also highlighted the trend of increasing inequality among states by using
per capita gross state domestic product data for the period 1980-1981 to 1998-1999. The
trend of the Gini coefficient indicating inter-state inequality is shown in Figure 5, which
confirms that inter-state inequality grew steadily in India with liberalization.
More evidence on increasing inter-state inequality came from Singh and others (2003), who
used regressions to check convergence in per capita consumption expenditures across states.
The study found absolute divergence of inter-state per capita consumption expenditures for
the periods 1983 to 1999-2000 and 1993-1994 to 1999-20004. A convergence exercise by
Jha (2004) indicated that the ranking of states with respect to inequality had not changed in
the reform period. According to his findings, inter-state convergence of the level of
inequality was weak.
During the early 1990s, it was observed that average consumption estimates, measured using
National Accounts Statistics (NAS) data, and tended to be consistently higher than NSS
consumption data. Consequently, NSS data showed higher poverty in India than NAS data. It
must be emphasized here that NAS data are not the most appropriate to use because poverty
estimates crucially depend on the distribution of incomes, and reliable poverty estimates cannot
be directly obtained from NAS data in the absence of income distribution data. However, in
spite of this NAS data limitation, the discrepancy between NAS and NSS poverty estimates
fuelled a debate about the relative merit of sample surveys and national accounts statistics in
India. Some proponents of the reform measures suggested that in the absence of any real
evidence that consumption inequality has widened among the poor, NAS data essentially
indicated that the National Sample Survey Organization (NSSO) survey results were not giving
the right picture. They argued that surveys were unreliable and error prone, and urged a revision
of the NSSO survey methodology to bridge the discrepancy between NSS and NAS data.
Among the pro-reformers, the opposition to the NSS methodology drew strength from the fact
that for the NSS rounds 46 to 54 (1990-1998), poverty was higher than for the 45th round
(1989-1990). These trends further fuelled the criticism that NSS surveys tended to
underestimate consumption and eventually led to the changes in the NSS methodology for the
55th round.
Following criticism of the NSS poverty estimates, the methodology used to carry out a large
scale consumer expenditure survey by the NSSO was modified in 1999-2000 (the 55th round).
16. 16
This led to serious compatibility issues between the 55th round and the previous rounds of NSS
surveys. As mentioned before, this debate has revolved around the changes introduced in the
questionnaire for the 55th round of the sample survey and the resultant changes in the data.
According to most economists, these changes exaggerate the consumption data of the surveyed
households, and thereby reduce measured poverty very sharply. It is not surprising that the 55th
round NSSsurvey showed a sharp decline in poverty in India. Unadjusted 55th round estimates
showed that the headcount ratio of poverty declined from 37.3 per cent in 1993-1994 to 27 per
cent in 1999-2000.
REVIEW OF LITERATURE
Employment growth and the distribution of income generating opportunities
The most significant link between growth and poverty reduction is employment generation,
which is why patterns of employment growth are usually critical in determining both changes
in income distribution and the incidence of poverty. During the 1990s, the employment growth
rate in India plummeted. Annexure A-Table 5 shows a very significant deceleration of
employment generation in both rural and urban areas, with the annual growth rate of rural
employment falling to only 0.67 per cent over the period 1993-1994 to 1999-2000. This is not
only less than one-third the rate of the previous period 1987-1988 to 1993-1994, but it is also
less than half the projected growth rate of the labour force in the same period. In fact, it turns
out that this is the lowest growth rate of rural employment in post-independence history.
The decline in rural employment can be directly attributed to the stagnation of agricultural
employment during the 1990s. NSSO data indicated that total employment in the agriculture
sector increased from 190.72 million in 19931994 to 190.94 million in 1999-2000, registering
an annual growth rate of only 0.02 per cent during this period. This was much lower than the
population growth rate over the same period (1.67 per cent), and also lower than the
corresponding figures for earlier periods (Annexure A-Table 6). In fact, the agricultural
employment growth rate plummeted to its lowest ever mark since the NSS began recording
employment data in the 1950s.
One of the major reasons behind the poor employment generation during the second half of the
1990s could have been attributable to the sharp decline in the employment elasticity of output
growth during this period. Among the sectors, employment elasticity’s fell in agriculture,
mining and quarrying, manufacturing, electricity, gas and water, transport, storage and
17. 17
communication, finance and insurance and services sectors. In general, the employment
elasticity of output growth was highest in the tertiary sector, followed by the secondary sector.
In the reform period, the employment elasticity of agriculture was the lowest, and among the
lowest observed in Indian agriculture since 1961.
Along with the stagnation of employment generation in the agricultural sector, the real wage
growth rate of agricultural labourers also stagnated during the 1990s. As Deaton and Dreze
(2002) showed, if one compared the growth rate of real wages for agricultural labourers with
that of public sector salaries, real agricultural wages grew at about 2.5 per cent per year during
the 1990s, whereas public sector salaries grew at about 5 per cent per year during the same
period. This partly explained the increased rural-urban inequality of the 1990s in India.
Inequalities in health, nutrition and education India’s performance in health is one area which
has been extremely disappointing over the years. Though there have been improvements in
some health related indicators like birth and death rates, India’s performance in a number of
health-related development indicators has been worse than Sub-Saharan Africa’s. Also, the
improvements have not been uniform throughout the country. Health services are much better
in urban areas, and there are differences in the population’s health across different regions.
Dreze and Sen (2003) pointed out that India has fared much worse than Sub-Saharan Africa in
nutrition-related indicators such as the proportions of undernourished children, low birth
weight babies and pregnant women with anaemia. The proportion of females to males in the
population is also lower in India than in Sub-Saharan Africa. World Bank data suggest that
about 53 per cent of children are undernourished, and the proportion of pregnant women with
anaemia is as high as 88 per cent. In fact, as far as these indicators are concerned, for all the
countries for which data are available, none—except Bangladesh—has fared worse than India.
Also, if one looks at basic gender inequality data, India is again right at the bottom of the world
table, along with Pakistan.
On certain other indicators like infant mortality and life expectancy, India’s performance is
relatively much better, but these figures hide considerable inter-state variations as well as
persistent vulnerabilities of some segments of the population.3 For example, life expectancy at
birth is about 55 in Madhya Pradesh, but in Kerala, it is more than 73 (1993-1997 data).
3 These variations increase with the level of dis-aggregation. For example, according to 1999 data, district-level
female literacy rates range between 9 and 84 per cent in India.
18. 18
Similarly, the number of women per 1000 males varies from 861 in Punjab to about 1058 in
Kerala.
ANALYSIS
Factors behind growing inequality and persistent poverty
The earlier discussion shows a perceptible increase in inter- and intra-regional inequality in
India during the reform period. This inequality is evident, not only in income terms, but also in
terms of health and access to education. This section discusses some factors which might be
responsible for the increase in inequality in India during the reform period.
Fiscal policy An important element of the economic reform process adopted in India was the
belief that a high fiscal deficit level was responsible for the 1991 crisis, and the deficit should
therefore be brought down to a certain pre-determined target. It was argued that a high fiscal
deficit is bad for an economy because it can be inflationary, can give rise to external deficits,
can lead to high interest rates and therefore crowd-out private investment, and can put an
unsustainable interest rate burden on an economy through accumulation of public debt.4 The
IMF program required the government to bring down the fiscal deficit to a level of five to six
per cent of GDP from the average of seven per cent of GDP for the period 1985-1990.
However, it was also part of the macro-policy paradigm that taxes should be rationalized and
direct tax rates should be cut so as to improve “efficiency” and provide incentives to private
investors. In addition, indirect tax rates were cut because of import liberalization and associated
domestic duty reductions. This meant that fiscal balance could not be achieved through
increased tax revenues, but would have to depend upon expenditure cuts. Therefore, to achieve
this targeted fiscal deficit, the government undertook major expenditure cuts during the 1990s
(Annexure A-Figure 6). Not surprisingly, the government found it difficult to cut current
expenditure, massive reductions were made in capital expenditure. As a result, central
government capital expenditure, as a share of GDP, declined steadily from 7.02 per cent for
the period 1986-1987 to 1989-1990 to 2.74 per cent for the period 1999-2000 to 2002-2003.
Public investments in crucial areas like agriculture, rural development, infrastructure
development and industry were scaled down. This adversely affected the already fragile state
of infrastructure in the economy and led to a virtual collapse of public services in areas like
4 These arguments against high fiscal deficits are often not supported by economic theory. Chandrasekhar and
Ghosh (2002) and Patnaik (2000, 2001a, 2001b) discuss problems of the neo-liberal arguments against high fiscal
deficits.
19. 19
education, public health and sanitation. As discussed by Chandrasekhar and Ghosh (2002), not
only were the plan targets for expenditure scaled down, but there were also huge shortfalls in
public investment, even relative to these reduced targets, during most years of the decade.
In addition, there was a decline in the central government’s current expenditure on rural
development accompanied by an overall decline in per capita government expenditure in rural
areas. The decline of government investment in rural areas marked a sharp turnaround from
the trend observed during the early 1980s, when there was a large increase in expenditure on
the rural sector. Political developments of the 1980s induced various governments to increase
the flow of resources to this sector. This led to higher demand generation in the rural sector,
and consequently resulted in lower poverty, economic diversification and increased rural
employment generation. However, over the 1990s, many policies which had contributed to this
rural development were reversed. Central government expenditure on rural development
schemes like agricultural programs, rural employment programs and anti-poverty schemes
were cut. This had a negative effect on rural poverty and employment generation during the
1990s.
2. Table 5.
The most significant link between growth and poverty
reduction is employment generation, which is why
patterns of employment growth are usually critical in
determining both changes in income distribution and
the incidence of poverty. During the 1990s, the
employment growth rate in India plummeted. Table 5 shows a very significant deceleration of
employment generation in both rural and urban areas, with the annual growth rate of rural
employment falling to only 0.67 per cent over the period 1993-1994 to 1999-2000. This is not
only less than one-third the rate of the previous period 1987-1988 to 1993-1994, but it is also
less than half the projected growth rate of the labour force in the same period. In fact, it turns
out that this is the lowest growth rate of rural employment in post-independence history.
The decline in rural employment can be directly attributed to the stagnation of agricultural
employment during the 1990s. NSSO data indicated that total employment in the agriculture
sector increased from 190.72 million in 19931994 to 190.94 million in 1999-2000, registering
an annual growth rate of only 0.02 per cent during this period. This was much lower than the
Rural Urban
1983 to 1987-1988 1.36 2.77
1987-1988 to 1993-
1994
2.03 3.39
1993-1994 to 1999-
2000
0.67 1.34
20. 20
population growth rate over the same period (1.67 per cent), and also lower than the
corresponding figures for earlier periods (Table 6). In fact, the agricultural employment growth
rate plummeted to its lowest ever mark since the NSS began recording employment data in the
1950s.
One of the major reasons behind the poor employment generation during the second half of the
1990s could have been attributable to the sharp decline in the employment elasticity of output
growth during this period. Among the sectors, employment elasticity’s fell in agriculture,
mining and quarrying, manufacturing, electricity, gas and water, transport, storage and
communication, finance and insurance and services sectors. In general, the employment
elasticity of output growth was highest in the tertiary sector, followed by the secondary sector.
In
Table 6
The reform period, the employment
elasticity of agriculture was the
lowest, and among the lowest
observed in Indian agriculture since
1961.
Along with the stagnation of
employment generation in the
agricultural sector, the real wage growth rate of agricultural labourers also stagnated during the
1990s. As Deaton and Dreze (2002) showed, if one compared the growth rate of real wages for
agricultural labourers with that of public sector salaries, real agricultural wages grew at about
2.5 per cent per year during the 1990s, whereas public sector salaries grew at about 5 per cent
per year during the same period. This partly explained the increased rural-urban inequality of
the 1990s in India.
Sen and Himanshu pointed out that though real wage growth of agricultural labourers was
positive, its impact on rural per capita income was less significant because the number of
agricultural labourers grew faster than the available days for wage employment. The authors
showed that according to NSS estimates, the percentage of the rural population in agricultural
labour households increased from 27.6 per cent to 31.1 per cent between rounds 50 (1993-
1983 1987-
1988
1993-
1994
1999-
2000
Employment
(millions)
151.35 163.82 190.72 190.94
Annual Growth
Rate (%)
1.77 2.57 2.23 0.02
21. 21
1994) and 55 (1999-2000), implying an average of 3.7 per cent annual growth of this
population. Against this, it reported less than 1.5 per cent average annual growth of wage paid
days of employment in agriculture. As a result, agricultural unemployment was on the rise, and
the increase in real wages had not resulted in an increase in the per capita income for rural
agricultural workers.
FIGURE 6
An important element of the economic reform process adopted in India was the belief that a
high fiscal deficit level was responsible for the 1991 crisis, and the deficit should therefore be
brought down to a certain pre-determined target. It was argued that a high fiscal deficit is bad
for an economy because it can be inflationary, can give rise to external deficits, can lead to high
interest rates and therefore crowd-out private investment, and can put an unsustainable interest
rate burden on an economy through accumulation of public debt. The IMF program required
the government to bring down the fiscal deficit to a level of five to six per cent of GDP from
the average of seven per cent of GDP for the period 1985-1990.
However, it was also part of the macro-policy paradigm that taxes should be rationalized and
direct tax rates should be cut so as to improve “efficiency” and provide incentives to private
investors. In addition, indirect tax rates were cut because of import liberalization and associated
domestic duty reductions. This meant that fiscal balance could not be achieved through
increased tax revenues, but would have to depend upon expenditure cuts. Therefore, to achieve
this targeted fiscal deficit, the government undertook major expenditure cuts during the 1990s
(Figure 6). Not surprisingly, the government found it difficult to cut cu already fragile state of
infrastructure in the economy and led to a virtual collapse of public services in areas like
education, public health and sanitation. As discussed by Chandrasekhar and Ghosh (2002), not
only were the plan targets for expenditure scaled down, but there were also huge shortfalls in
public investment, even relative to these reduced targets, during most years of the decade.
23. 23
FIGURE 8
Source: Reserve Bank of India Handbook of Statistics on Indian Economy (various
issues).
Extremely skewed inter-state distribution of domestic and foreign direct investment (FDI) has
also contributed to increased inter-regional disparities in India. State-wise data on (aggregate)
FDI approvals between 1991 and 2002 show that only a handful of states have managed to
attract a very high share of FDI (Figure 8). From the figures, it can be seen that the top 10
Indian states attracted more than 63 per cent of total foreign direct investment in India. In
contrast, the bottom 10 states together received less than 1 per cent of total FDI. There is also
a strong regional disparity in the pattern of FDI flows, with the southern and western states
faring much better than the other parts of the country. Three southern states (Andhra Pradesh,
Karnataka and Tamil Nadu) received more than 20 per cent of total FDI, while Maharashtra
and Gujarat (both in Western India) received 17.35 per cent and 7.7 per cent of FDI
respectively. In contrast, the seven North-Eastern states together received only 0.03 per cent of
total FDI during the same period. This unequal distribution of FDI across states in India is not
unexpected, as FDI inflows tend toward states with better infrastructure and development. The
concentration of FDI in a few pockets in India therefore did not help to reduce inequality during
the reform period.
Figure 8. States of India with FDI share of more than 1 Percent
0
2
4
6
8
10
12
14
16
18
Per cent
24. 24
Apart from its much skewed regional distribution, FDI flows in India also exhibit a strong
sectorial bias. In India, a very high proportion of FDI has gone into high-end consumer goods
and financial services like banks, insurance companies and consultancy services. It has also fl
owed into information techno sector, attracted by special concessions, including guaranteed
returns, offered by the government for such investments. However, benefits accruing from FDI
in terms of fixed investments, exports and technological upgrading have been less than
expected. This happened because since the 1990s, a significant part of FDI came in the form
of mergers and acquisitions (M&As). As opposed to green-field FDI investment, M&As do not
create productive capacity and hence do not benefit the host country as much. In fact, there are
some negative consequences if M&As lead to the formation of monopoly powers in an
industry. Also, typically with such mergers, employment stagnates or falls. This often
counterbalances or even negates the increase in employment of multi-national corporation
(MNC) affiliates, so that employment increases tend to be the least buoyant of all the major
variables associated with MNC production.
Financial sector reform.
The crisis of 1991 hastened the process of financial liberalization pursued by the Indian
government since the mid-1980s. Financial liberalization was designed to accomplish the
following objectives: a) make the central bank more independent; b) relieve financial
repression by freeing interest rates, and introduce various new financial instruments and
innovations in the Indian financial system; c) reduce directed and subsidized credit; and d)
allow greater openness and freedom for various forms of external capital flows. It should be
noted that these objectives were not realized in full, and indeed, the lack of completeness of
such financial liberalization has been one important reason for the relative financial stability of
the country, unlike several other ‘emerging markets.’
The most adverse effect of financial liberalization on inequality came from policies which eased
‘priority sector’5 lending norms for nationalized banks. Until the 1980s, nationalized banks had
obligations to fulfil priority sector lending targets. But post-liberalization, the priority sector
definition was widened to include many more activities, and the emphasis in banking shifted
instead towards maintaining the capital adequacy level prescribed by the Basle accord. As a
5 Priority sector includes agriculture and small and medium scale enterprises (SMEs).
25. 25
result, most banks now avoid lending to small farmers and small scale industries, as they are
perceived to be less creditworthy customers. This has had dramatic effects on the viability and
cultivation of small enterprises, which are the largest employers in the country, and has
therefore indirectly impacted income distribution and poverty reduction.
A report by a Reserve Bank of India working group concluded that the recent slowdown in
priority sector lending principally owes to risk aversion due to a high proportion of non-
performing loans (RBI 2004). However, the composition of the non-performing assets (NPAs)
of Indian public and private sector banks shows a somewhat different picture. According to
RBI data, as of 31 March 2002, 77.91 per cent of total NPAs in private sector banks were in
non-priority sectors, while priority sectors accounted for only 21.8 per cent of total NPAs. For
public sector banks, 53.5 per cent of NPAs were accounted for by non-priority sectors, 44.5
per cent of total NPAs were in priority sectors. Anecdotal evidence suggests that a number of
big Indian business houses are responsible for a substantial share of the non-priority sector
NPAs. Collusion of big business houses with the political elite has prevented strong legal
measures against defaulters.
The decline in priority sector lending has led to a significant reduction in rural credit from
formal channels, which has had major effects in terms of costs and the feasibility of cultivation.
The irony is that the rural sector continues to contribute savings in the form of deposits into the
banking system, leading to low and falling ratios of credits to deposits in rural banks. The
reduced access to and higher cost of agricultural credit obviously means not just increased costs
of cultivation, which has not been given adequate policy attention, but also adversely affected
private investment in agriculture.
Another consequence of financial liberalization has been the high inflow of foreign private
capital into India. A look at the RBI balance sheet shows that since 1993-1994, there has been
a sharp increase in the Net Foreign Exchange Assets (NFEA) of the RBI. To moderate the
growth of Reserve Money, which is defined as the sum of Net Foreign Exchange Assets
(NFEA) and Net Domestic Assets (NDA) of the RBI, the RBI had to constrain the growth of
NDA. This was partly done by selling domestic currency bonds in the market (sterilization),
and partly by restricting RBI credit to the domestic sector. As a result, the share of NFEA
increased from 20.44 per cent in 1992-1993 to 65.01 per cent in 2000-2001 (Annexure A-
Figure 7).
26. 26
Liberalization of foreign and domestic investment
Extremely skewed inter-state distribution of domestic and foreign direct investment (FDI) has
also contributed to increased inter-regional disparities in India. State-wise data on (aggregate)
FDI approvals between 1991 and 2002 show that only a handful of states have managed to
attract a very high share of FDI (Annexure A- Figure 8). From the figures, it can be seen that
the top 10 Indian states attracted more than 63 per cent of total foreign direct investment in
India. In contrast, the bottom 10 states together received less than 1 per cent of total FDI. There
is also a strong regional disparity in the pattern of FDI flows, with the southern and western
states faring much better than the other parts of the country. Three southern states (Andhra
Pradesh, Karnataka and Tamil Nadu) received more than 20 per cent of total FDI, while
Maharashtra and Gujarat (both in Western India) received 17.35 per cent and 7.7 per cent of
FDI respectively. In contrast, the seven North-Eastern states together received only 0.03 per
cent of total FDI during the same period. This unequal distribution of FDI across states in India
is not unexpected, as FDI inflows tend toward states with better infrastructure and development.
The concentration of FDI in a few pockets in India therefore did not help to reduce inequality
during the reform period.
Trade liberalization
Trade liberalization is essentially inequitable in nature since it distributes income in favour of
the export sector and against the import competing sector. Unless the gains from trade are
redistributed, trade liberalization will always change income distribution, which may imply
higher inequality. In India, a similar phenomenon can be observed, but not necessarily along
the lines predicted by traditional Hecksher-Ohlin trade theory. The more employment-intensive
sectors have been adversely affected, rather than encouraged, by trade liberalization. Opening
up trade has helped certain sub-sectors, both in manufacturing and services, where India is
internationally competitive, but mainly in activities using relatively skilled labour in the Indian
context. By expanding the markets for these sectors, trade liberalization has definitely created
some pockets of prosperity in India, but on the other hand, it has negatively affected most other
manufacturing sectors and agriculture. The situation in agriculture is most disturbing because
about 70 per cent of the population depends upon this sector. Continued subsidization of
agriculture by developed countries and the resultant distortion of global agricultural trade is
one of the important factors behind the poor performance of agriculture. Yet, other
27. 27
macroeconomic policies, such as patterns of public spending and financial policies have also
played a role. Small and medium enterprises in the manufacturing sector have also been hit by
trade liberalization. Typically, employment intensive domestic production has been displaced
by imports of similar goods using more capital intensive production methods abroad.
28. 28
CONCLUSION
In India, although there are claims that inequality has decreased in the post-liberalization
period, careful analysis of data shows that these views are mostly unsubstantiated. Comparable
estimates of the 50th (19931994) and 55th (1999-2000) rounds of National Sample Survey data
reveal that inequality increased both in rural and urban India. Several authors have also pointed
out that though the richer sections of the population benefited in the post-liberalization period,
there has been a stagnation of incomes for the majority, with the bottom rung of the population
severely negatively affected by this process. There is also evidence that, both at the national
and the state levels, income disparities between the rural and urban sectors increased during
this period. State-level data also showed that not only had the income gap between the poorest
and the richest states increased during the 1990s, but urban inequality increased for all the 15
major states in India. Inequality also alarmingly increased in the North-Eastern part of the
country, where all the states experienced increased rural and urban poverty during this same
period.
One of the reasons behind the increased income inequality observed in India in the post-reform
period has been the stagnation of employment generation in both rural and urban areas across
the states. Open unemployment increased in most parts of the country, and the rate of growth
of rural employment hit an all-time low. Declining employment elasticity in several sectors,
including agriculture, was one of the main reasons behind this decline. Low employment
generation in the agriculture sector has also been associated with a steady, but significant
increase in casualization of the labour force in India. Due to large scale downsizing and
privatization of public sector units, employment generation in the organized sector also
suffered. However, the services sector performed relatively better during this period. The
employment growth rate in this sector was higher than in other sectors of the economy.
Particularly in some sub-sectors like information technology, communication and
entertainment, employment generation and wages increased substantially in this period.
However, these sectors employed only a very small section of the labour force, and their impact
on the overall employment scenario has been minimal. One countervailing force to the lower
employment generation has been increased economic migration, typically to other countries in
Asia and the Middle East. This has been especially important in certain regions and provided
an important alternative source of transfer income to local residents through remittances.
However, these flows have had little to do with domestic policies and more to do with
international economic processes.
29. 29
The discussion of health and education related indicators shows that though there has been
some progress by India in these areas, this progress has been unsatisfactory, even when
compared to other developing countries. Huge inter-state disparities in health and education
related indicators remain across the country. State involvement and investment in these sectors
has historically remained very low and declined even further during the 1990s. Gradual
withdrawal of the state from these sectors and increased reliance on the private sector are likely
to further exacerbate the already inequitable distribution of health and education services in
India.
A number of policies adopted during the reform period essentially increased the level of
inequality in India. Liberalization of trade helped some sectors where India was internationally
competitive, but it also negatively affected the other sectors. The agriculture sector, as well as
small and medium enterprises, which account for the bulk of employment, were the worst hit
by the trade liberalization undertaken by policymakers since the mid-1990s. The inflow of FDI
into India has only marginally improved gross domestic capital formation, but its incidence has
been confined to some very small pockets, both geographically and sector ally. This has
increased inter-state and inter-sectorial inequalities in the country.
Emphasis on reduction of the fiscal deficit also increased inequality in India during the reform
period. Due to pressures from powerful lobbies, direct and indirect tax rates declined in India.
The government’s failure to reduce current expenditure implied that most of the adjustment to
reduce the fiscal deficit was carried out by reducing capital expenditure and rural expenditure
generally, as well as by selling PSUs to generate one-time revenue. Reduction of capital
expenditure reduced public investment in key infrastructural areas and social welfare schemes.
In a country like India, where the level of infrastructure development is poor, public investment
in infrastructure is critical, not only for its direct developmental effects, but also because it
brings in private investment through it’s crowding in effects.
Attempts to reduce government expenditure on food subsidies and social welfare schemes have
also had serious negative effects on inequality in the country. In their zeal to adopt market-
oriented reform measures, Indian policymakers have tended to overlook the fact that not only
the so-called ‘market economies’ of Europe and America, but also the industrialization success
stories of East Asia, all spend a very high percentage of their GDP on health, education and
social security. Notwithstanding the free market rhetoric, these countries have steadily
increased their public expenditure on social services since the 1980s.
30. 30
Other market-oriented reform measures, like closure of non-profit making PSUs, have
seriously undermined the social objectives of the PSUs and negatively affected employment
and economic development in some parts of the country. The closure of non-profit-making
PSUs hurt the backward regions of the country more severely because the profit-maximizing
private sector often does not find these areas economically attractive.
Opening up the economy and financial sector liberalization also had major negative
consequences for weaker sections of the population. The introduction of prudential norms for
private and public sector banks and the Basle NPA benchmark made wary banks avoid lending
to borrowers in agriculture and to small enterprises. As a result, credit flows to agriculture and
to small and medium enterprises (SMEs) went down drastically in recent years. This reinforced
the problems faced by these sectors due to trade liberalization and the complete removal of
quantitative restrictions on imports.
All of this points to conclusions with implications for government policy. The first is the crucial
importance of continued and increased public expenditure for productive investments in
infrastructure as well as for social expenditures and ensuring food access. Both aggregate
expenditure and the pattern of public expenditure are important. In addition, fiscal federalism—
relations between the central and provincial governments—are very significant in large
countries like India. Methods of raising resources for government expenditure, such as the
pattern of taxation, also impact this connection. The relationships between growth patterns and
the extent and type of employment generated have been extremely important as well. Trade
liberalization has had dis-equalizing effects; while it provided more opportunities for some
export activities, there were adverse effects for those employed in import-competing sectors,
especially in small-scale activities. FDI patterns have tended to reinforce existing inequalities,
possibly even more than domestic investment.
31. 31
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